Deciding Which Charges to Pursue

Posted on: 18 March 2015

Do you owe more on your car than it's really worth? If so, as painful as it may sound, it might be in your best interests to surrender your car back to the bank during your bankruptcy. You do have other choices, but this is what you should know when making your decision.

1.) If you reaffirm on your car loan, you are taking on worthless debt.

Reaffirmation is the process where you agree to keep an old debt out of the bankruptcy for some reason. It's usually used with cars and houses.

The problem with reaffirmation is that you are stuck with that debt forever - no matter how long it takes. You can't change your mind later and walk away, and you can't discharge that debt in a future bankruptcy. So, if in a year's time you realize that your car is falling apart, you're still stuck with those payments. 

2.) Surrendering the vehicle doesn't mean that you can't get a car loan.

If the car is unreliable, or has "negative" equity, surrendering the vehicle to the bank probably makes more financial sense. Emotionally, however, you may be afraid that you'll never get another car loan again, especially since you'll now have a bankruptcy on your credit record.

In reality, it's not that hard to get a car loan after bankruptcy. There are lenders who even specialize in auto loans to consumers who have been through a bankruptcy. While you may be stuck with a high interest rate for a while, you can often refinance at a lower rate after a few months. Your own bank or credit union may be willing to take the chance, once you've re-established your credit a little.

3.) If you don't reaffirm your car, you may still be able to keep it.

Some lenders will repossess your car unless you reaffirm (or pay the car off). Others will allow you to remain in an informal arrangement with them and keep the car, as long as you continue making the payments. 

Your attorney will likely know whether or not your lender is going to demand that you reaffirm or surrender the vehicle. If your lender isn't going to demand that you reaffirm, the advantage to you is tremendous: if you later realize that keeping the car was a mistake, you can walk away from it. You won't still owe the old debt, because the debt on the car will have been discharged during your bankruptcy.

4.) You can force the loan company to let you redeem the vehicle at fair market value.

This may be an under-utilized option that's overlooked by many. You can get an appraisal on the vehicle and then ask the bankruptcy trustee to order the loan company to let you pay off the car for its actual value, instead of the full value of the loan.

In order to "redeem" (pay off) the old car loan, you'll probably have to get a new car loan through one of the many "second chance" lenders out there that specialize in that type of loan. Your interest rate will be high, but you can still save thousands off the cost of your current loan.

Talk with your attorney about your choices and listen carefully to his or her advice. Letting a car go back to the bank can be very upsetting to some people and frightening to others. But, if you're "upside down" in the loan, your attorney may ultimately advise you to surrender the vehicle, rather than be stuck with it.